IBUS 401 EXAM 3 (CH 13 -
17)CORRECT 100%
Motives for DFI - ANSWER 1. Revenue Related
2. Cost Related
Revenue Related Motives for Direct Foreign Investment - ANSWER 1. Attract New
Sources of Demand
2. Enter Profitable Markets
3. Exploit Monopolistic Advantages
4. React to Trade Restrictions
5. Diversify Internationally
Cost Related Motives for Direct Foreign Investment - ANSWER 1. Benefit from
Economies of Scale
2. Use Foreign Factors of Production
3. Use Foreign Raw Materials
4. Use Foreign Technology
5. React to Exchange Rate Movements
How is the Benefit from Economies of Scale a cost related motive for DFI - ANSWER
increased production results in a lower average cost per unit
How does a MNC use DFI to react to Exchange Rate Movements - ANSWER if a firm
perceives that a foreign currency is under valued, the firm may consider DFI in that
country, as the initial outlay should be relatively low
Benefits of International Diversification - ANSWER 1. Reduces Exposure to Domestic
Economic Conditions
2. Reduce Cash Flow Risk by increasing stability
3. Reduce the Firm's Cost of Capital
4. International Project lower risk for same expected return
When using DFI to reduce risk by way of Intentional Diversification would an MNC
target:
A. countries whose economies are related (correlated) to the home country
B. countries whose economies are unrelated (not correlated) to the home country -
ANSWER B. The MNC would Target countries whose economies are UNRELATED
(NOT CORRELATED) to the home country when attempting to Internationally Diversify
What are the ideal effect of DFI on a Foreign Country - ANSWER 1. Reduces
Unemployment of the country
2. Increases Countries Access to Technology
3. Doesn't take away business from local firms
, What are the Barriers to DFI - ANSWER 1. Protective Barriers
2. "Red Tape" Barriers
3. Industry Barries
4. Environmental Barries
Define protective barrier in regard to DFI - ANSWER when an agency prevents an MNC
from acquiring companies if they believe the employees will be laid off
Define "red tape" barrier in regard to DFI - ANSWER procedural and documentation
requirements
Define Industry barrier in regard to DFI - ANSWER local firms may have substantial
influence on the government and may use their influence to prevent competition from
MNCs
Some MNCs establish a manufacturing facility where there is a relatively low cost of
labor, but they sometimes close the facility later when the cost advantage dissipates.
Why do you think the relative cost advantage of these countries is reduced over time?
(Ignore possible exchange rate effects.) - ANSWER As MNCs capitalize on low cost
labor, they may create a strong demand for labor, which can cause labor shortages and
increased wage rates, thereby reducing any cost advantage.
Why would foreign governments provide MNCs with incentives to undertake DFI there?
- ANSWER The ideal DFI solves problems such as unemployment and lack of
technology without taking business away from local firms.
Define Multinational Capital Budgeting - ANSWER Financial Analysis that states how
good or bad a project is in a foreign country
Explain the importance of Perspective (Local vs. Parent) in regard to tax differentials -
ANSWER different tax rates may make a project feasible from a subsidiary (local)
perspective, but not from a parent's perspective
Explain the importance of Perspective (Local vs. Parent) in regard to Restrictions on
Remitted Earnings - ANSWER Governments may place restrictions on whether
earnings must remain in the country
Define Excessive Remittances - ANSWER when the parent company charges a fee to
the subsidiary
Explain the importance of Perspective (Local vs. Parent) in regard to Excessive
Remittances - ANSWER if the parent company charges fees to the subsidiary, then a
project may appear favorable from a parent perspective, but not from a subsidiary (local
perspective)
17)CORRECT 100%
Motives for DFI - ANSWER 1. Revenue Related
2. Cost Related
Revenue Related Motives for Direct Foreign Investment - ANSWER 1. Attract New
Sources of Demand
2. Enter Profitable Markets
3. Exploit Monopolistic Advantages
4. React to Trade Restrictions
5. Diversify Internationally
Cost Related Motives for Direct Foreign Investment - ANSWER 1. Benefit from
Economies of Scale
2. Use Foreign Factors of Production
3. Use Foreign Raw Materials
4. Use Foreign Technology
5. React to Exchange Rate Movements
How is the Benefit from Economies of Scale a cost related motive for DFI - ANSWER
increased production results in a lower average cost per unit
How does a MNC use DFI to react to Exchange Rate Movements - ANSWER if a firm
perceives that a foreign currency is under valued, the firm may consider DFI in that
country, as the initial outlay should be relatively low
Benefits of International Diversification - ANSWER 1. Reduces Exposure to Domestic
Economic Conditions
2. Reduce Cash Flow Risk by increasing stability
3. Reduce the Firm's Cost of Capital
4. International Project lower risk for same expected return
When using DFI to reduce risk by way of Intentional Diversification would an MNC
target:
A. countries whose economies are related (correlated) to the home country
B. countries whose economies are unrelated (not correlated) to the home country -
ANSWER B. The MNC would Target countries whose economies are UNRELATED
(NOT CORRELATED) to the home country when attempting to Internationally Diversify
What are the ideal effect of DFI on a Foreign Country - ANSWER 1. Reduces
Unemployment of the country
2. Increases Countries Access to Technology
3. Doesn't take away business from local firms
, What are the Barriers to DFI - ANSWER 1. Protective Barriers
2. "Red Tape" Barriers
3. Industry Barries
4. Environmental Barries
Define protective barrier in regard to DFI - ANSWER when an agency prevents an MNC
from acquiring companies if they believe the employees will be laid off
Define "red tape" barrier in regard to DFI - ANSWER procedural and documentation
requirements
Define Industry barrier in regard to DFI - ANSWER local firms may have substantial
influence on the government and may use their influence to prevent competition from
MNCs
Some MNCs establish a manufacturing facility where there is a relatively low cost of
labor, but they sometimes close the facility later when the cost advantage dissipates.
Why do you think the relative cost advantage of these countries is reduced over time?
(Ignore possible exchange rate effects.) - ANSWER As MNCs capitalize on low cost
labor, they may create a strong demand for labor, which can cause labor shortages and
increased wage rates, thereby reducing any cost advantage.
Why would foreign governments provide MNCs with incentives to undertake DFI there?
- ANSWER The ideal DFI solves problems such as unemployment and lack of
technology without taking business away from local firms.
Define Multinational Capital Budgeting - ANSWER Financial Analysis that states how
good or bad a project is in a foreign country
Explain the importance of Perspective (Local vs. Parent) in regard to tax differentials -
ANSWER different tax rates may make a project feasible from a subsidiary (local)
perspective, but not from a parent's perspective
Explain the importance of Perspective (Local vs. Parent) in regard to Restrictions on
Remitted Earnings - ANSWER Governments may place restrictions on whether
earnings must remain in the country
Define Excessive Remittances - ANSWER when the parent company charges a fee to
the subsidiary
Explain the importance of Perspective (Local vs. Parent) in regard to Excessive
Remittances - ANSWER if the parent company charges fees to the subsidiary, then a
project may appear favorable from a parent perspective, but not from a subsidiary (local
perspective)
